Should I Invest in Gold?

With the recent financial crisis gold is getting a lot of attention.  I’m starting to hear a lot more radio ads promoting the tremendous benefits to gold. These ads will cherry pick a favorable period of time to show how much more gold has made than stocks. 

First a quick summary on the historical price of gold.  Reviewing a chart on the price of gold from 1968 until today reveals the price was below $100 an ounce, but quickly spiked to over $600 during the early 1980’s.  It quickly dropped to a range between $300 and $400 and stayed there for over 20 years.  In this decade gold has climbed from $300 to just over $1,100. When I looked at another chart from 1868 to 2000 it looks like the price floated between $25 and $50 an ounce until the early 1980’s. 

I have always viewed gold as a low returning asset, because until recently the price never seemed to go up, and it certainly doesn’t pay dividends. Recently, the price of gold has raised a lot and may still be a decent hedge against inflation going forward.  I have to admit that last fall the events were unsettling enough that I went out and bought a little bit, and have made around 10% on that purchase.   Does it make me feel safe?  Not really.

It could be a rational thought to view gold not as an investment but rather an insurance hedge against Armageddon.  If that’s your logic, and you can afford to invest in something that doesn’t produce any income then go for it. 

I also promote that portfolios that want to be hedged against inflation allocate between 5% and 10% to commodities, and gold is one type of commodity.  But I would prefer you diversify among all commodities, such as oil, natural gas, gold, silver and agricultural gains to name a few. 

My core belief is that the average household would be better served, and would be a whole lot better off, by using the money they were going to invest in gold to pay down their debt. 

I recently made this statement to a client of mine who recently paid off his house, “Some people run to gold for safety.  I turn to being debt free and cash strong.  I’m glad you selected this option as well.”

Many of you know that I promote a debt free lifestyle.  I have been the subject of numerous banker jokes over the years.  My confidence and resolve grew even stronger this last year when I was reviewing my personal net worth which I prepare every June 30th.  My June 30, 2009 net worth vs. my 2008 net worth is virtually identical.  I attribute this remarkable outcome to living debt free and saving the proceeds that I would have wasted on payments.

I’m not against gold.  I think it can be a great inflation hedge along with other assets, but I would rather you work on your net worth in an orderly fashion.